Almost seven out of every ten American households that have children under 18 say that they would be in jeopardy if the primary breadwinner dies. Life insurance is meant to replace a person's income to provide for dependents until they can support themselves or depend on other funds. Examine options carefully to ensure your family's protection in the future without spending a fortune now.
Determine Your Needs
Life insurance presents a catch 22: you don't want to get too much insurance and have to pay higher premiums, but you don't want to leave your family without sufficient funds to cover expenses. Getting an accurate estimate of your real needs can help you save money by not purchasing too much insurance. A basic rule of thumb is to get an insurance policy that represents six to ten times as much as your annual salary. For a more accurate estimate, add up expected final expenses, the cost of the mortgage and other debts and anticipated educational expenses for any children. Then, divide half of your gross annual income in half and further divide by 0.5 percent. For example, if you earn $50,000 a year, divide this by 0.05 to get the value of $500,000. Add this number to your previous calculation of debts and expenses to determine how much insurance you need.
Shop around for estimates from various life insurance companies. Consumer Reports recommends using an online broker who has ties with many insurers. When you contact the sales agent, determine how familiar she is with the underwriting for each insurer. For example, insurers may have different thresholds for charging higher premiums based on cholesterol levels or a family health history.
You can apply for insurance online, but state law requires at least telephone contact with one of the Web site's licensed insurance agents. Before you go too far, size up how well the agent knows the underwriting quirks of various insurers. Each insurer sets its own criteria for rate classes, so some will set higher or lower premiums based on differing thresholds for, say, cholesterol levels or whether one of your parents or siblings was ever diagnosed with cancer before age 60.
Check Their Rating
To make sure that you are not socking away your cash in a policy that may turn out later to be worthless, check the insurance company's rating from an independent rating agency. A cheap policy does little good if the company won't be around to fulfill its obligation or make survivors jump through too many hoops to collect. Consumer Reports recommends using companies that receive an "A" rating from TheStreet.com or the "AAApi" rating from Standard & Poor.
Guaranty associations protect life insurance benefits for up to $300,000 in most states. By keeping your policy within this amount, you can protect yourself. Check with your specific state to see how large of a policy you can get and still be protected. If you require more insurance than your state will protect, purchase multiple policies within the prescribed limits.
Life insurance companies research actuary tables to determine the statistical probability for when a person will probably die, based on age, health, hobbies and other factors. Making some lifestyle changes before applying for life insurance, like losing weight, quitting smoking or giving up a skydiving hobby may decrease the premium that you'll have to pay. Getting life insurance when you are young and healthy can also save you big bucks.
- Chicago Tribune: A Premium Consideration
- MSN Money: Term or Permanent Life Insurance?
- Consumer Reports.org: Is Your Life Sufficiently Insured?
- Wealth Pilgrim: 5 Tips to Get the Cheapest Term Life Insurance Program
- CNN Money: Choosing the Right Life Insurance
- Kiplinger: How Much Life Insurance Do You Need?
Samantha Kemp is a lawyer for a general practice firm. She has been writing professionally since 2009. Her articles focus on legal issues, personal finance, business and education. Kemp acquired her JD from the University of Arkansas School of Law. She also has degrees in economics and business and teaching.